Shuen Chan, Head of ESG at LGIM Real Assets, outlines the benefits of a place-based approach to impact investment to real estate investors, property occupiers and the wider community.
The investment community’s increasing focus on environmental objectives is non-negotiable given the catastrophic impacts of climate change, some of which we are already facing today. However, it is just as critical that our transition to a lower carbon economy is both fair and inclusive; social and environmental objectives must go hand in hand. Real estate owners and investors, therefore, have a unique opportunity to play a tangible role in delivering on the ‘S’ of ESG. One way we can do this is through adopting a place-based approach to impact investment.
Historically, the ‘S’ has been pigeonholed as a niche asset class due to the misplaced perception that social impact will compromise financial returns. However, investors are now waking up to the reality that delivering social value and impact does not always come at the expense of risk-adjusted returns. There is a compelling argument that real estate owners should be considering social impact as an indispensable aspect of all investment activity, in much of the same way the environment has become embedded into the process.
At the heart of this discussion lies the question of how real estate investors can generate tangible benefits for its occupiers, support local businesses and the community, and deliver more innovative solutions, by embedding a social impact lens across its operational and management activities.
The answer is a place-based impact strategy that is fully aligned with the commercial objectives of the business. This can be achieved without sacrificing returns. In most instances, there is a natural alignment between the commercial interests of longer-term owners and contributing to improving economic, societal and environmental outcomes for the local community.
Taking a broader view
Beyond this, it’s essential that investors take a broader view to ‘returns’. Using the retail sector as an example, the industry shouldn’t be purely focused on initiatives that only generate immediate rental income; it is equally important to consider broader drivers of commercial success, such as increased footfall, customer engagement and improved trading performance of occupiers, which over the longer term translates into improved rental outcomes and a more sustainable engagement model with the local community.
By injecting vibrancy, nurturing successful local businesses, and responding to the community’s individual needs, our occupiers and the local community reap the benefits. Alongside this, through supporting local entrepreneurship and diversification, real asset portfolio managers can deliver social and economic impact. And finally, by retaining and introducing successful occupiers, portfolio managers can build a more diversified and resilient income for their investors. Place-based impact investment can therefore drive far-reaching value.
For an investor to claim that they have generated true positive social and environmental impact, their initiatives should be additional, intentional and measurable in both quantitative and qualitative metrics. This means that the investment should be one which would not otherwise have happened without the investors’ influence, and done primarily with the aim of achieving social and environmental outcomes that benefit key stakeholders.
Widely adopted in the UK public sector, the National Social Value Measurement Framework – or National TOMs (themes, outcomes and measures) for short – is a method of reporting and measuring social value to a consistent standard, which investors can use to assess the impact of their initiatives. This encompasses delivering local jobs (either via skills or direct employment opportunities), creating more resilient local communities, catalysing the growth of local businesses as well as protecting the environment and promoting innovation.
Still, many have deemed social value and impact through investment as only achievable if done at small scale. This critical issue needs to be overcome; the industry must develop models that can be replicated at scale, where all processes align with the local framing, through an understanding of the needs of the local community. This approach involves focusing on the area’s specific social (and environmental) challenges.
There is evidence of this on a local scale in Poole, where the Dolphin Centre, a retail asset, has welcomed the country’s first ‘Think Big Clinic’, with the NHS’s University Hospitals Dorset. Not only aimed at tackling patient waiting times, the centre will cover dermatology, orthopedics, ophthalmology and breast screening. By setting up a breast screening unit in the middle of Poole, the Trust will be able to offer women from all over the county the opportunity to have mammograms, which were delayed by Covid-19, in a purpose-built unit. This has not only diversified the asset offering for the community, but has delivered significant placed-based social impact.
Flexibility and optionality are also key to the successful protection of future occupiers of real assets, along with a range of factors including access to customised data which will allow investors to continue investing in communities on an evidence-based approach – finding out which initiatives work, and what impact they have on customer engagement and the local community, alongside the turnover of individual operators.
From intent to impact
It is clear that there is political momentum behind the levelling up and building back better agendas, which is both welcome and overdue. However, it is crucial that this sentiment is translated into action; institutional investors have the ability to play an important role in this process, and sustain the recent momentum. Those who do not engage proactively on social issues risk being left behind.
Ultimately, generating place-based impact does not need to involve sacrificing financial returns: A stronger, healthier and more dynamic local economy has the ability to nurture the occupiers of tomorrow, and long-term investors can play an important role in catalysing the development of local businesses and a sustainable economic recovery.
Real estate owners have a duty to be proactive in futureproofing their assets; not only in ensuring they’re viable for investors over the medium to long term, but also ensuring they deliver positive social, environmental and economic outcomes and impact for the communities in which they reside. If we want our assets to be fit for purpose, and for the future, understanding and addressing local needs, supporting greater community integration and local economic resilience through place-based impact must sit firmly on top of the agenda.